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ESCALATION: The great industry scam

01 April 2005

Escalation formulas mean that many aircraft being delivered are costing far more than their market value. How long, asks Alasdair Whyte, can manufacturers can keep taking money from their most loyal customers?

"Escalation is one of the great scams of the aviation
industry," says one airline CFO. "Escalation is not a word our
industry can afford. Period. It needs to go," says John
Plueger, chief operating officer of ILFC, in Los Angeles,
Airbus and Boeing's largest customer. "Escalation is a typical
example of how airlines are forced to cut costs and increase
productivity whilst suppliers don't need to try," says Wolfgang
Kurth, former CEO of German charter Hapag-Lloyd, in
Hannover.
If you ask anyone who has ordered aircraft in the past five
years you will get a similar response. Customers are furious
about a concept of which many people in aviation have never
heard – and they have had enough.
The theory behind escalation clauses is simple. Manufacturers
add them to protect themselves against inflation when customers
order aircraft to be delivered in the future. Escalation
clauses have been used for many...